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Recovery? What recovery? - Outside View

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Recovery? What recovery?
Apr 30, 2014

The U.S is about to complete five years of the so called recovery since the Great recession that ended in the second quarter of 2009 as acclaimed by the Nation Bureau of Economic Research (NBER). Broadly speaking, it hardly feels like a recovery. Even so, there has been a barrage of voices from amongst the economists, analysts, who have been claiming nothing short of a victory. Many have been highly optimistic expecting growth in the trajectory of upwards of 3% and increasingly inching towards the 4% levels suggesting that the U.S. economy is now firmly out of the woods.

The one thing that the US markets seemingly aren't focusing on is that there hasn't been much evidence of an economic improvement in the US, neither in the data nor in the Fed's own forecasts that would indicate a stand towards rate increases. As far as the data goes, Wages are growing just at 2% annually. House building activity has fallen sharply in recent months. This tells us that there is much progress to be made if the economy is to be made healthy.

It is a known fact that US is a consumption driven economy. If consumption were to look better then you really need money in the hands of the people to go out and spend. People will get money through incomes from employment or borrowing. Both the indicators are far from showing any promising signs.

In this first part of the article, we try to cover the employment scenario in detail which according to us is the most important aspect to ascertain the health of any economy.

The reduction in unemployment rate from 10% to 6.7% is touted as an indication of recovery but despite the fact that unemployment has tumbled still a large chunk of the population is missing their payrolls. Here's a break up of unemployment in US by group:

Men: 6.2 Percent (previous: 6.3%)

Women: 5.9 percent (previous: 6%)

Teenagers: 20.7 percent (previous: 20.2%)

Whites: 5.7 percent (previous: 5.9%)

Blacks: 12.1 percent (previous: 11.9%)

Hispanics: 8.4 percent (previous: 8.3 percent)

Asians: 4.8 percent (previous: 4.1 percent)

The answer to this is large share of the decline in the unemployment rate can be explained by discouraged workers leaving the labour force. This effect can be seen in the falling participation rate.

Chart: US Employment and Participation Rate (%)
Source: Bloomberg

The labour force participation rate, has fallen by close to 3% from about 66% to 63%. Of this decrease, 1.3% and 4.7% were driven by the 16-24 and 25-54 age groups, respectively. The rest was offset by a 3.1% increase in participation by the ageing population i.e. 55+ age group. This is reflective of a deep problem, as it suggests that retires are failing to make ends meet and have to work for longer or even come out of retirement, and that the future workforce, those in their prime working years, are leaving the labour force.

A careful look at the data tells us that without the 3% contribution from the ones staring at their retirements i.e. the 55+ age group, the labour force would have fallen below 60% for the first time since 1971, a period when the participation rate was starting to expand, driven mainly by women entering the workforce.

This "un-recovery" phenomenon can also be explained by the employment to total population ratio which also suggests that it's been a jobless recovery if at all. The employment to population ratio has fallen from about 63% to close to 58%. This level was last seen not before the early 1980's.

Chart: US Employment to Total Population Ratio
Source: Bloomberg

That's not all; the trend is likely to continue. During the 2012-2022 period, BLS expects the growth of the labour force is anticipated to be due entirely to population growth, as the overall labour force participation rate is expected to decrease from 63.7 percent in 2012 to 61.6 percent in 2022.

Chart: US Labour force Participation Rate
Source: Bloomberg

The unemployment scenario doesn't show much signs of improving. Such a weak core labour force growth suggests that US potential GDP growth has declined considerably over time. The dependency ratio will increase over time as the participation rate increases which means that all those employed will be strained further to feed the growing class of dependents.

In the next article, we will see if there is a story surrounding the borrowing aspect that can underpin the recovery. If not, then what has all the QE aka money printing over the last few years really accomplished? So if the QE's 'accomplishments' are like Band-Aid on a gun-shot wound then should you rejoice? Or should you start looking at a more stable asset class (if the Band-Aid falls off as does the value of the dollar) that has carried and maintained its value through the ages. Its time, dear readers, to look a lot more closely at Gold.

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